Have an $18.50 target. GLTA
Q2/24 Preview: Hard To Focus On Results Right Now Our Conclusion
Performance in DRI’s upcoming Q2 is clearly going to take a backseat to any
updates that the interim management team provides with regards to the
forced resignation of ex-CEO Behzad Khosrowshahi. At the time of the
announcement, DRI’s Board was confident it had a good sense of the nature
and the extent of the inappropriate expenses, but the investigation does
remain ongoing. Our primary concerns in the wake of Mr. Khosrowshahi’s
removal relate to the Trust’s ability to continue sourcing and executing future
royalty deals, as well as any additional improprieties that may be discovered
through the investigation and whether this event results in any changes to
the relationship between the Trust and Fund Manager. We expect units to
remain rangebound at current levels as new management works to rebuild
investor trust. Quarterly results, barring significant unexpected milestone
receipts, don’t seem likely to be a standalone catalyst that reignites interest,
and we expect it will take continued execution on the pipeline to ease
worries. That said, with the units trading at 0.9x book value and at a 35%
discount to our DCF-based price target, we still see value in the existing
portfolio alone.
Key Points
Pipeline & Deployment Update: While we have doubts that DRI will be
ready to close a royalty deal so soon after the CEO departure, a positive
update on the deal pipeline and the willingness of counterparties to still deal
with the Trust could start the process of rebuilding confidence. We may also
get an update on how soon DRI will be willing to deploy capital on royalties,
and whether more substantial unit buybacks are a potential alternative given
the sharp selloff in the unit price following Mr. Khosrowshahi’s abrupt
departure.
Key Drug Performance: With Orserdu, Omidria and VONJO making up a
substantial proportion of the Trust’s portfolio, we are more focused on the
performance of those assets. VONJO sales bounced back in Q1 after a weak
Q4 and Orserdu has continued to show impressive growth since its 2023
approval. Portfolio concentration amongst the three drugs makes it important
to keep a close eye, but the drugs have performed well to date.
Royalty Market Update: DRI management has repeatedly made reference
to the current health of the royalty market given the lack of alternatives to
raise capital for royalty owners. We expect that the market remains robust
but are interested to hear an update from management given its unique
insight into the market.
Earnings Information: Earning Release: August 6 after market
Conference Call: August 7 at 8:00 a.m. ET. Dial-in: 1-888-664-6392